Why General Electric shareholders have something to worry about

Looking at a three-year price chart of General Electric isn't for the faint of heart. For all of 2016, the industrial conglomerate's stock price hovers around $30 per share. But then, in 2017, the slide begins and doesn't end until March of this year. Since then, the per-share price has mostly stayed between $13 and $15.

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For some analysts, this is evidence that the bleeding has stopped, and it's time to jump into -- or jump back into -- the stock. The shares have fallen so far, the reasoning goes, that there's very little downside and potential upside.

But there are still good reasons to be worried about GE's long-term future. Here's why.

Hard luck

GE has been profoundly unlucky in its timing over the past decade or so. Its financial services and consumer credit arm, GE Capital, had grown to be its largest business segment, which left it holding the bag in 2008 when the financial crisis hit and consumers started defaulting on their loans.

The company had started to get itself back on track by 2014, in part thanks to then-CEO Jeff Immelt's focus on building up GE's oil and gas services division, which seemed like a great idea with oil prices above $100/barrel. Of course, then oil prices collapsed and left oil services companies -- including GE -- in the lurch.

Throughout all of this, margins were poor in GE's flagship consumer appliance and consumer lighting divisions. And now the company's power segment is struggling, too, along with power turbine makers across the world, such as GE's biggest rival Siemens.

Still, perhaps the unluckiest person of all is new CEO John Flannery, who had been capably managing the company's healthcare unit -- which, along with its aviation unit, is a consistent outperformer -- and then walked into a hornet's nest of a C-suite. In his first six months, he was forced to downgrade earnings expectations, announce an unexpected insurance charge that ended payments from GE Capital, and cut the company's dividend in half.

The bad timing, though, may be continuing, as GE is finally spinning off its oil and gas division -- which it had merged with Baker Hughes to form Baker Hughes, a GE Company -- just as oil prices are recovering. But even if the company's timing starts to get better, things may still languish at GE.

A rock and a hard place

With its oil and gas business spun off, its consumer appliances business sold to Haier, its transportation business sold to Wabtec, and various other divisions up for sale (lighting, healthcare) or already sold (water), GE is going to end up primarily comprised of two business units: its powerhouse aviation division, far and away the company's strongest, and its struggling power division. The company's third remaining division, renewable energy, is much smaller than the other two in terms of both revenue and earnings.

While the aviation business is expected to grow, thanks to GE's market dominance in aircraft engines, the power division is expected to continue to languish, which has caused Flannery to reduce guidance for the troubled unit by half a billion dollars. And with power end-markets continuing to shrink, there may be more to come. In 2017, power segment orders were down 13% year over year, earnings collapsed by 45.1%, and margins had shrunk to just 5.6%. Contrast that with the company's aviation division, which saw 24.3% margins, a 12% year-over-year increase in orders, and modest increases in both revenue and earnings.

Clearly, aviation is where it's at for GE, but the company's aviation segment is going to continue to be held back by its underwhelming power segment. And -- unlike with the other businesses that are being cut loose -- these two may not be as easy to disentangle from each other.

An uneasy marriage

Essentially, all three of GE's remaining businesses are turbine manufacturers (aircraft engine turbines, gas turbines, and wind turbines). That means there's a lot of operational synergy -- particularly where R&D is concerned -- among these three segments. For example, GE Aviation's hot new LEAP engine depends on lightweight ceramic blades originally developed for its power segment.

In essence, that means the struggling power division is better off attached to the aviation division than out on its own -- if an interested buyer could even be found -- unless Flannery wants to take the extreme step of loading up the power division with a bunch of debt and obligations and spinning it off to get rid of it. He's already using that tactic with the healthcare division, transferring $18 billion of debt and pension obligations to the unit before spinning it off, so it seems unlikely he'd try it again.

For now, though, the sales of the transportation and healthcare businesses and GE's stake in Baker Hughes will generate some much-needed cash to shore up the company's balance sheet -- and hopefully avoid further downgrades by ratings agencies -- but it leaves GE with nothing left to sell, making it more imperative that the company turn its power segment around.

Unfortunately, though, because the problem seems to be in the end-markets, there's not much Flannery can do. He admitted as much in a May presentation, saying there would be "no quick fix" to the power division's woes, and predicting an even softer market in 2019 and 2020.

Investor takeaway

During his brief tenure as CEO, Flannery has proven himself capable of making tough-but-necessary calls to shore up the business. But despite all of his savvy moves to improve the company's finances, cut costs, and streamline operations, weakness in the power segment continues to be a millstone around the company's neck, and there doesn't seem to be any easy or quick way to fix it.

It's possible the market for heavy-duty gas turbines, the segment's bread and butter, will improve faster than GE is predicting. Or that a new innovation or further cost-cutting will turn the company's outlook around. But unless and until that happens, it's going to continue to be a rocky road for investors. GE's share price might not drop any further, but strong growth doesn't seem to be in the cards anytime soon. I'd put my money elsewhere.

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